Premier Foods ‘most likely’ to sell Hovis to foreign firm

Faith, hope and Power Brands: Premier's top management team believes the eight key brands are reviving the firm's fortunes. But could Hovis be up for sale?

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Premier Foods, Hovis

The most likely buyer for Premier Foods’ bread brand Hovis will be a foreign firm, according to an industry expert.

Britain’s largest food manufacturer was reported to be sounding out the market earlier this week (October 29) for possible buyers for Hovis as declining sales of sliced bread and the soaring cost of wheat have squeezed the brand’s margins.

The news followed Premier Foods’ announcement
that it had sold its sweet pickles and table sauces business to Mizkan for £92.5M in cash.

Julian Wild, food group director at legal firm Rollits, told FoodManufacture.co.uk: “I can’t believe there’s a UK buyer because Allied Bakeries and Warburtons have enough to handle themselves and there’d be competition issues anyway. It’s bound to be an international player.”

Graham Jones, executive director of city analyst Panmure Gordon, agreed that further disposals were possible for Premier – including from its bread division.

Speaking after the Mizkan sale, Jones said: “We don’t think this rules out further disposals (such as sweet dehydrated powders, for example). And we think no option is being ruled out in bread, including exiting milling, looking again at logistics costs, or even selling the business as a whole if a high enough offer is received.”

If the sale goes ahead, Hovis would be the first of Premier’s power brands to be sold. When he took over the troubled business, Clarke’s strategy was to concentrate on promoting the eight brands: Hovis, Mr Kipling, Bisto, Oxo, Ambrosia, Batchelors, Sharwood’s and Loyd Grossman.

Wild said: “The fact that the core brands identified were across the grocery area suggests that bread baking isn’t the way forward for Premier. But I wouldn’t have thought there would be a long list of potential buyers [for Hovis].”

Walking away from £75M

Hovis recently walked away from a £75M contract to supply the Co-operative Group with its own-brand bread because the deal had “very low margins, was costly to service and would not affect 2012 performance”. The contract was subsequently snapped up by Allied Bakeries.

Wild said: “£75M wouldn’t make a lot of difference. A lot of business is low margin for Hovis but that was a piece they were particularly happy to walk away from.

“Bread baking is a tough area in which to make profit – as Allied and Warburtons have both seen – very competitive raw material prices are a big issue.”

One problem for Premier in making a sale of Hovis would be the division of the milling and baking areas of the business, according to Wild.

“It’s difficult to divide milling and baking because they are so inter-connected so it’s hard to establish where the profit is made – I always thought it was on the milling side.”

Keeping the banks happy

As Premier has now made sufficient disposals to reduce debt levels to the bank’s required levels, Wild said it was now essential that it invested in the remaining business to maximise profit and keep shareholders happy.

“You can’t just continue disposing of businesses because it’s driving the business backwards,” he said.

“Now they’ve satisfied the banks they’ve got to find a way of growing their core business to boost their stock market rating.”

Premier's most likely areas of investment would be ambient grocery, according to Wild.

“They’ve come out of chilled by selling Brookes Avana so it’s largely about ambient grocery now,” he said.

“I would have thought they’re going to invest in marketing and capital expenditure to boost those core brands and they’re more likely to invest organically than to acquire anything further. I can’t imagine the stock market being happy about them going on the acquisition trail.”

What the companies said about the pickles sale:

Michael Clarke, Premier’s ceo: “I’m delighted to have exceeded our disposal target 20 months early while, at the same time, delivering three successive quarters of sales growth and taking £40M of overhead costs out of the business this year. We can now focus our attention on driving further momentum in our Grocery business and unlocking value in bread.”

Kazuhide Matazaemon Nakano, ceo Mizkan, said: “Branston Sweet Pickle is an iconic brand that has established a market-leading position. The Branston brand is also an excellent strategic fit with our global portfolio and adds to our solid foundation for growth in the UK.”